KARACHI: State Bank Governor Jameel Ahmad has said banks need to diversify beyond the government sector and increase financial deepening, stressing that no country can achieve sustainable economic growth with low levels of private credit.

Speaking at the Pakistan Banking Summit on Tuesday, Mr Jameel said banks’ credit to the private sector as a percentage of GDP declined to 8.4 per cent by fiscal year 2024 — almost half the level seen in 2004. Pakistan’s bank deposit- and private-sector credit-to-GDP ratios have also remained among the lowest compared to peer countries, he added.

Countering the common argument that government lending has crowded out the private sector, Mr Ahmed noted that in some countries, despite equally high or even greater government borrowing from commercial banks, the private sector still holds a significant share of the financial sector’s portfolio.

Pakistan’s banks allocate around 74pc of their lending to established sectors, while only 5pc goes to small and medium enterprises (SME). This imbalance highlights the need for banks to reassess their strategies, said the SBP governor. With a more stable economy, he hoped that the government’s borrowing would be curtailed and the banking sector could look towards increasing credit to the private sector, particularly the SMEs and agriculture sector.

Pakistan has lowest deposit, private credit ratios, SBP chief tells banking summit

However, he also acknowledged the banking sector’s role in expanding bank account coverage, which has risen from 47pc of the adult population in 2018 to 64pc today. The gender gap has also narrowed from 47pc to 34pc. By 2028, the SBP aims to increase bank account coverage to 75pc of the adult population and reduce the gender gap to 25pc. Achieving these targets will require the financial sector to enhance its services’ depth, breadth, and quality.

The governor suggested leveraging AI, digitisation and financial innovation to fulfil these goals. The summit officially launched the eKYC (Electronic Know Your Customer) initiative, replacing manual processes with a secure, digital framework that aligns with these objectives.

Emphasising the government’s push for digitisation, Mr Ahmed noted that Raast QR code payment solutions are now available at over 800,000 merchant locations, with a target of onboarding at least two million merchants by the end of the year.

With the federal budget just a few months away, the sector used this forum to air its concerns, while the government appears focused on managing expectations. Echoing the SBP governor, Finance Minister Muhammad Aurangzeb yesterday urged banks to expand lending to the SME sector. Citing examples of smaller financial institutions shifting from collateral-based to cash-flow-based lending, he encouraged banks to explore opportunities among underserved players in the SME and agricultural sectors.

On the other hand, the banking sector presented its counter-narrative. The message conveyed at the summit was of a beleaguered industry, misunderstood by stakeholders and policymakers. The heavy taxation burden, which has impacted the general public, seems to have fallen the heaviest on banks.

The banking summit repeatedly emphasised the importance of the banking sector in the growth of the economy. It also highlighted the sectors’ grievances, with Atif Bajwa, Chairman of the Pakistan Banking Summit and CEO of Bank Alfalah, calling the sector ‘the favourite whipping boy’ of the government. “If you make too much money, either Islamabad treats you like a criminal or taxes you,” said Mr Bajwa, whose statements of patriotism in the face of mounting challenges were met with applause and a standing ovation by banking professionals.

However, the macroeconomic crisis and high interest rates have led banks to generate windfall profits. As highlighted by Zafar Masud, chairman of the Pakistan Banking Association (PBA) and the CEO of Bank of Punjab, 99.8pc of budgetary deficit support to the government comes through the banking sector, allowing banks to enjoy the fruits of high interest rates. With nearly 40pc of the population living in poverty, according to the World Bank, and the middle class feeling the strain, perhaps it’s unsurprising that profitable sectors are expected to contribute accordingly.

Published in Dawn, February 26th, 2025